How we increased our net worth by 250% in 5 years

Posted on April 12, 2016

Increasing your net worth is a very important step in becoming financially independent but the question is, how to increase your net worth? The answer is simple actually. To grow net worth, you must be financially responsible with your money. One of the key things to become financially responsible is to have a money management system so you can track your cash flow. You need to know your cash inflow and outflow.

Do you know how much you spend on food on a monthly basis? Do you know how much you spend on clothing on a monthly basis? Do you know how much you spend on dining out on a monthly basis? Do you know how much you save on a monthly basis?

If you can’t answer these questions, I believe you’re in trouble.

Since moving out from home in my early 20’s, I’ve always tracked my spending. But it wasn’t until 2011 that Mrs. T and I started tracking everything meticulously and review our expenses every half year. While there are many different types of budgeting systems out there, they are all about keeping track of your expenses so your cash inflow is greater or equal to your cash outflow. This budgeting system I’m about to go over is something that we learned from Secrets of the Millionaire Mind.

The budgeting system described by T. Harv Eker is very straight forward. You breakdown your after tax income into 6 different accounts and allocate a certain percentage for each account.

Necessities (55%)

Education (10%)

Play (10%)

Financial Freedom Account (10%)

Long Term Savings for Spending (10%)

Give (5%)

Let me go over each account one by one.

Necessities

This account shouldn’t require a lot of explanation. All the essential expenses like rent, mortgage payment, food, car insurance, life insurance, utilities, clothing, car gas, and etc come out from this account. Basically all the expenses that you need to live, hence for the name necessities.

Education

Money set aside in the Education account is used to further enhancing yourself as a human being. You may decide to take a photography class, get some life coaching, or learn another language. Recently Mrs. T and I signed up for a parental course to aim to become better parents. Life is all about continuous learning, so allocating 10% of your income to improve yourself is a great idea.

Play

The purpose of the Play account is to nurture yourself. Savers like me typically would save, save, save, and save more. We never want to spend any unnecessary money because we feel guilty when we spend money. This may lead us to eventually become like Mr. Scrooge. The play account allows people like me to spend money guilt free. I could go to my favourite restaurant and order some fancy food, I could get a massage, I could go on a weekend getaway, or go out and have a few drinks with my buddies. Money in the play account can be used on my “wants.”

Financial Freedom Account (FFA)

Money set aside for the FFA account is used to create your golden goose for retirement. This account essentially allows you to paying yourself first. This idea of paying yourself first is mentioned in almost every personal finance book that I’ve read. I think the concept is extremely important when it comes to growing your net worth. The money in FFA account is used to create passive income streams and eventually allow you to become financially free. By default the percentage is 10% but I’d argue this amount needs to be much much larger. The key point of FFA account is to never ever withdraw money from this account before you become financially free. Never slaughter your golden goose! Use only the eggs 🙂

Give

You set money aside in the Give account for giving it away. Mrs. T and I believe giving is a very important part of life. We are fortunate to be where we are financially and it’s great to be able to provide a helping hand to the less fortunate. For example, we donate money each month to Vancouver Food Bank and we also regularly donate money to charities like Canadian Red Cross and United Way. We’ve also used money in this account for Christmas and birthday gifts to family.

The starting percentages listed above is a good start but you can always adjust them to fit your needs. The goal is to reduce the 55% allocated for the necessities account and increase the 10% for FFA to a higher number.

Since started this budget system, we have taken it to the next level and changed the percentage allocation for every single account to fit our situation. We have been able to reduce money going into the necessity account and increasing money going into both the LTSS and the FFA accounts.

Does this budgeting system work? You bet it does!

Since implementing this budget system in 2011, we’ve been able to achieve the following results:

Hi I’m Bob from Vancouver Canada, I am working toward joyful life and financial independence through frugal living, dividend investing, passive income generation, life balance, and self-improvement. This blog is my way to chronicle my journey and share my stories and thoughts along the way.
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So exciting to know your net worth increase percentage! And I love the idea of the “save to spend” account. That gives you a little more mental freedom to actually spend that money instead of feeling like every dollar out the door is slowing down your progress to FI. And have you read the Millionaire Next Door? In it, he talks about what you should expect to have saved, based on your age and income. That was super eye-opening for us. Because, sure, we can actually save pretty quickly based on our incomes alone, but understanding that we were underperforming in wealth accumulation was the reality check that we needed. That gave us the motivation to up our game, and now we’re ahead of where we “should” be, which feels great!

Tawcan

April 13, 2016 at 11:02 am

Hi our next life,

Glad that you enjoyed the little detail that I’ve shared. Yes have read Millionaire Next Door a few years ago, our net worth is higher than the formula I think. When we read the book we were nowhere close though.

Dividend Hustler

April 12, 2016 at 9:08 pm

Keep it up Tawcan. You and your wife are doing awesome bud. I’m sure one day you will be able to full fill your dream in writing that 1 Million Dollar Check. I know it’ll happen and I’ll be there to shake your hand. Keep hustling hard and enjoy that family bud. Cheers.

Tawcan

Hey Tawcan, that is amazing what you have achieved in 5 years and really goes to show how much of a difference people can make if they try.

At the moment we have allocated all our expenses (plus a bit of fun/luxury). Everything left after that goes into savings. Whether we boost our cash or invest (or use for IVF) is up to us at that point. So we don’t have set %s, just guideline actual $ amounts.

Tawcan

Having a plan and being intentional is such a key to growing your net worth. I agree with having a percentage allocated for “play” you need to included a little fun in the budget or managing money, work towards goals can become a chore.

Tawcan

April 13, 2016 at 11:04 am

Very good point Brian. You can just save save and save, you’ll feel exhausted and eventually want to just blow a bunch money. The play account allows you to spend a little bit of money to enjoy yourself.

I like how simple the system is, we do not have a budget currently. For the last few years we have been slowly increasing our savings %, whatever is left after that and our fixed bills is to “live” on. I do like the idea of setting aside separate accounts for travel.

Tawcan

Great job on your net worth. That’s an amazing accomplishment in such a short time. I would love to double our net worth in 5 years, but I don’t think that’s realistic at this point. I don’t really agree with the break down. Everyone has to prioritize their budget for themselves. Our saving % is higher. Travel is where most of our play money goes.

Great job on the increase in your networth obviously, but I also think it’s great that you budget your donations to charity. We give between 8-10% annually, split between our church and secular charities. We think it’s so important, and it helps remind us how blessed we are.

I hope you guys have a great week, and you get more sleep this week:) -Bryan

Tawcan

Chris

April 13, 2016 at 12:22 pm

No budget system and no real tracking of expenses (or income) either. My wife and I have a much simpler system. Set up automatic payment for all recurring bills – ie credit cards, mortgage, taxes, utilities. Done. Set up automatic withdrawal of investment for RRSP and TFSA accounts. Done. Spend or invest the remainder as we wish. Usually, we look at increasing my wife’s RRSP investment if she has room and it makes sense from a tax perspective. We make sure to keep a few thousand handy for emergencies (ie new washer/dryer or whatever). Otherwise we feel free to spend what is left as we want – a trip, dining out, whatever…. We have never tracked the income or expenses to any degree, and only do our net worth once per year, but it has always gone up. Works for us.

Tawcan

this numbers are really impressive, while reading this I am even more motivated to reach such numbers as well :). Yes I do also keep record of my monthly expensive and income as well and it helped me to save more money.

Tawcan

This is awesome, Tawcan. Very impressive. I’ve never felt the need to use a strict budget for future spending, but it’s tremendously helpful to look back at prior years and months and to figure out if it’s aligned with your goals and values. I like the categories you laid out.

Wow Tawcan, some incredible numbers there – fantastic and well done to you (and Mrs Tawcan) for sticking to your budget system. That must have taken a lot of focus and determination but you have shown what can be achieved!

The only budget I have is for my groceries, I don’t feel the need to monitor anything else and this seems to work for me.

Tawcan

PMV

April 19, 2016 at 7:08 pm

Great job Tawcan. Percentage increases like 250% (meaning $1 became $3.50 in 5 years) depend a lot on the starting baseline. I agree with Retire by 40 on this front. Your net worth increase works a massive 28% CAGR. Over the same 5 year period, I have achieved only a 12% CAGR but I started with a $1 mill net worth 5 years ago. Another way to put this in perspective is to calculate the ratio of net worth to your annual earned income at start and end points. If you are starting at NW to Income ratio of say, 2, it’s easier to achieve this kind of percentage growth with disciplined savings than if you are starting with the ratio being at, say 7, even though your savings percentage might be same.

Tawcan

April 20, 2016 at 4:45 pm

Hi PMV,

Agree that it definitely depends on your baseline. I think our CAGR will probably start to slow down as our net worth becomes more and more significant. Same concept applies to our dividend income as well. A $200k increase when your base net worth is $100 is quite significant, not so much when your base net worth is $2M.

Tawcan

zeejaythorne

June 26, 2016 at 10:13 am

My plan is focusing on non-school debt for the next few months. Then build up a down payment. Once I purchase a small condo, my expenses will go way down with no more wasteful roommates and a mortgage lower than my rent. My plan then will be 35% to necessities, 35% student loans, 15% investment, and 15% long term saving. The skill I’m building now will double my income. When I double my income, I will pay off the remainder of the smaller student loan, and then destroy the larger student loan. In three years, I should be debt-free. My plan will change again. 20% necessities, 50% investment and 30% long term savings.

CJC

December 6, 2017 at 5:38 pm

Bob, was wondering when you set up those accounts, what bank are you doing it with, are you setting up savings accounts that you can withdraw from. For example for the necessities are you setting up all your bill payments to come from there?

My mission is to show that financial independence is indeed possible for a family with kids while living in an expensive city like Vancouver.

My focuses include dividend & ETF investing, financial independence, early retirement, happiness, fruguality, and finding the right personal balance between saving for the future and enjoying life today.